The upgrade reflects JAFZ’s improved liquidity profile and leverage metrics, on the back of stronger-than-expected operating performance and reduced leverage metrics. This was supported by the disposal of EZW Gazeley LTD, by the prepayment of debt, and by a reduction of the interest payable on its term loan. Fitch believes that JAFZ’s credit metrics will continue improving in the next two years, supported by stable operating performance and the improved liquidity position.

KEY RATING DRIVERS

Improved Leverage Metrics

JAFZ’s total adjusted debt/EBITDAR has improved to 3.8x at FYE13 from 6x at FYE12, driven by stronger-than-expected operating performance and the Gazeley disposal. Following successful renegotiation with its banks, aided by reduced leverage, interest payable for JAFZ’s term loan was reduced to 3% from 4.25%, which led to reduced financing costs, also improving net interest cover (NIC). Fitch forecasts continued improvement in JAFZs leverage metrics in the next two years. However, significant deviations from Fitch base case caused by worse-than-expected economic conditions, lower occupancy rates and rental revenues could lead to a negative rating action.

Improved Operating Performance

JAFZ’s revenue was AED1.53bn in 2013, up 7% yoy. EBITDA margin was well above historical averages; 80.6% at FYE13 compared with 76.8% at FYE12.The improvement was backed by improved economic sentiment in the Dubai market and increased occupancy rates. JAFZ has historically maintained stable rental revenues and EBITDA margins at around 75%, backed by a fairly stable business model. Fitch expects profitability and revenue growth to normalise at historical averages as the economy starts cooling down.

Gazeley Sale

On 11 June 2013, Brookfield Asset Management announced the acquisition of EZW Gazeley LTD from Economic Zones World (EZW), part of Dubai World. Under the provisions of JAFZ’s AED4.4bn (USD1.2bn) Islamic facility, a guarantee was provided by EZW and linked to the completion of a full or partial disposal of Gazeley, which led to a mandatory prepayment of the Islamic facility but limited to greater of USD300m or two thirds of net cash proceeds. Ninety per cent of the prepayment was made in June 2013 while the remaining 10% was paid in September 2013.The sale has had a positive impact on JAFZ’s capital structure, liquidity and debt serviceability.

Increased Capex and Liquidity

JAFZ’s liquidity profile improved significantly in the past years on the back of higher profitability, proceeds from the Gazeley sale, reduced financing costs, and restricted capex. Fitch expects modest increases in capex in the medium term, as JAFZ builds additional warehouses and office spaces in anticipation of strong demand. We forecast that the new investments will be financed by internally generated funds and that JAFZ will maintain a liquidity score (available liquidity/total short term uses) above 1.5x in the medium term.

Significant Contribution to Economy

JAFZ’s activities are important to Dubai’s economy – the companies based in the free zone account for approximately 20% of GDP, and represent a key driver of the development of trade and transport. However, all of JAFZ’s operations are based in Dubai, leading to high concentration risk.

Stable Performance

JAFZ’s main source of revenues comes from recurring leasing and rental revenue (FYE13: 85.3%). Rentals and revenues from the administration of real estate have held up fairly well in the past three years, despite Dubai’s challenging real estate market conditions – and have outperformed our rating case. In 2013 rentals and occupancy rates continued increasing on the back of an improving economic environment. Almost 80% of leasable land, 94% of warehouses, 92% of offices and 87% of onsite residential accommodation were occupied as of 31 December 2013. It should be noted that other than land, which has on average a remaining life of six years, most of the lease contracts are renewed annually.

Dependent on Dubai

JAFZ’s business tends to be less volatile and sensitive to asset bubbles than the broader Dubai office market. Its performance is correlated to the general level of economic activity in Dubai, which is itself dependent on the health of the regional and global economies as well as regional political stability. The large and increasing supply of rental properties in the free zone sector is a risk.

Usufruct Rights

As with most property investment companies that reduce leverage by selling assets, JAFZ generates free cash flow to repay debt, as it does not own its real estate assets, but was granted a usufruct right and concession by the Jebel Ali Free Zone Authority, which matures in 2106. JAFZ’s lack of an investment portolio is constraint on the ratings.

RATING SENSITIVITIES

Positive: Future developments that could, inidvidually or collectively, lead to a positive rating action are: